CASE STUDY:

INVENTEC
CORPORATION

Fiona Chia Wei Lin .

Frank Poh .
Jiang XinYan . .
Neo Li Yun Yvonne Ng Ee Huang Yvonne . Ng Yi Hui Kyna
AGENDA
1. Introduction
2. Drivers of profitability of ODM Industry
3. Factors accounting for Inventec low
profitability
4. Key factors for above-average profits
5. India software VS China ODM
6. Strategic advice
Introduction
DEFINITIONS

Original Equipment Manufacturer (OEM) – Brand firms, the original manufacturers

prior to outsourcing
E.g. Hewlett-Packard, Dell, Apple
 
Original Design Manufacturing (ODM) – The designing and manufacturing of electronic
products for client companies (OEMs) that market them under their own brand

Electronics Manufacturing Services (EMS) – Manufacturing of electronic products

based on clients’ designs

ODM firms usually own the intellectual property rights to their designs.

Introduction Q2: Drivers of Q1: Factors accounting for Q3: Key factors to Q4: Indian Software Q5: Strategic advice
average profitability Inventec’s low profitability be managed Industry
Introduction

1975 1991 1996 1999 2004

Began as Began shifting IPO on Established 4 Nearly 27,000
contract some Taiwan’s subsidiaries to employees
manufacturer operations to stock specialise in worldwide,
of telephones China exchange various revenue
& calculators industries exceeding $6
billion

Introduction Q2: Drivers of Q1: Factors accounting for Q3: Key factors to Q4: Indian Software Q5: Strategic advice
average profitability Inventec’s low profitability be managed Industry
Introduction
Summary of the Case
• Inventec is part of the ODM industry that started with the proliferation of
motherboard companies in Taiwan during the 1980s.

• Over time, manufacturers added design staff so they could add more value and
increase margins.

• Eventually they were designing entire computers, then computer peripherals

(servers, cameras, mobile phones, PDAs, MP3 players)

• Since the 2001 easing of Taiwan government restrictions of high tech investment
in China, all major ODM firms had shifted some of their operations to China due to
lower operating costs.

• In 2005, in at least 10 Taiwanese PC factories in and around Shanghai, thousands

of PCs were produced daily.

Introduction Q2: Drivers of Q1: Factors accounting for Q3: Key factors to Q4: Indian Software Q5: Strategic advice
average profitability Inventec’s low profitability be managed Industry
Introduction
Problems Inventec faced
• Fierce competition in a saturated industry
• Increasing labour costs due to higher demand for Chinese
engineers
• Notebook PCs became the mainstay of Inventec since 1995, but
gross margins had dropped below 4% by 2004
• Inventec was excessively reliant on HP-Compaq’s business, which
accounted for 75% of Inventec’s notebook production in 2004

LOW PROFIT MARGINS

Introduction Q2: Drivers of Q1: Factors accounting for Q3: Key factors to Q4: Indian Software Q5: Strategic advice
average profitability Inventec’s low profitability be managed Industry
ODM Industry

What are the drivers of the average

profitability of the Original Design and
Manufacturing (ODM) industry?

Introduction Q2: Drivers of Q1: Factors accounting for Q3: Key factors to Q4: Indian Software Q5: Strategic advice
average profitability Inventec’s low profitability be managed Industry
ODM Industry
Threat of
Substitute
Products Bargaining Power of
Buyers
Threat of New Entrants

ODM Industry Bargaining Power

Rivalry Among Profitability
Existing Firms of Suppliers

Introduction Q2: Drivers of Q1: Factors accounting for Q3: Key factors to Q4: Indian Software Q5: Strategic advice
average profitability Inventec’s low profitability be managed Industry
ODM Industry

Rivalry Among Existing Firms : High

●
● High competition as existing firms compete for the same client pool, which often awards
contracts on a split basis
●
● Industry is fragmented and firms engage in serious price competition
●
● Contract only lasts for the product life cycle which makes the switching cost for clients low

Introduction Q2: Drivers of Q1: Factors accounting for Q3: Key factors to Q4: Indian Software Q5: Strategic advice
average profitability Inventec’s low profitability be managed Industry
ODM Industry

Threat of New Entrants : Medium

●
● Low due to high barriers of entry from exploitation of large economies of scale and the low
profit margin within the industry does not serve as an attractive incentive for new entrants
●
● However, EMS firms are making their transition into the ODM market and do have the
necessary knowledge to leverage on

Introduction Q2: Drivers of Q1: Factors accounting for Q3: Key factors to Q4: Indian Software Q5: Strategic advice
average profitability Inventec’s low profitability be managed Industry
ODM Industry

Threat of Substitute Products : N.A.

●
● Irrelevant to the ODM industry

Introduction Q2: Drivers of Q1: Factors accounting for Q3: Key factors to Q4: Indian Software Q5: Strategic advice
average profitability Inventec’s low profitability be managed Industry
ODM Industry

Bargaining Power of Buyers : High

●
● Generally low switching cost for OEMs as technology only lasts for that particular life cycle
●
● Price sensitive as PC industry had matured and end consumers are less brand-influenced
●
● Consolidation among OEMs and reduced reliance through multiple partnerships have
increased their bargaining power

Introduction Q2: Drivers of Q1: Factors accounting for Q3: Key factors to Q4: Indian Software Q5: Strategic advice
average profitability Inventec’s low profitability be managed Industry
ODM Industry

Bargaining Power of Suppliers : High

●
Labour and component parts are the major costs for an ODM firm
●
● More and more organizations (including ODM firms) have shifted operations
into China, leading to substantial increase in demand for engineers
●
● Microsoft and Intel had almost exclusive share of the operating system and
the processor industry, ODM firms have little bargaining power

Introduction Q2: Drivers of Q1: Factors accounting for Q3: Key factors to Q4: Indian Software Q5: Strategic advice
average profitability Inventec’s low profitability be managed Industry
ODM Industry
ODM Industry
Profitability

Bargaining Power
of Suppliers
*HIGH*

Threat of Bargaining
Substitute Power of Buyers
Products *HIGH*

Threat of New Rivalry Among

Entrants Existing Firms
*MEDIUM* *HIGH*

Introduction Q2: Drivers of Q1: Factors accounting for Q3: Key factors to Q4: Indian Software Q5: Strategic advice
average profitability Inventec’s low profitability be managed Industry
Inventec’s
Low Profitabilty

Despite its growth and size, why is Inventec not

very profitable?

Introduction Q2: Drivers of Q1: Factors accounting for Q3: Key factors to Q4: Indian Software Q5: Strategic advice
average profitability Inventec’s low profitability be managed Industry
Inventec’s
Low Profitabilty

Industry-related Factors
Competitive nature of ODM industry
• Players have to constantly underbid each other to win design and
manufacturing contracts from a handful of PC firms
• EMS firms are also competing for the same client base.

OEMs reticent about their ODM use

• Some OEMs fear that too much outsourcing can risk their reputations
• Fear of losing control over intellectual property
• Fear of ODM firms becoming direct competitors (BenQ and Motorola)

Introduction Q2: Drivers of Q1: Factors accounting for Q3: Key factors to Q4: Indian Software Q5: Strategic advice
average profitability Inventec’s low profitability be managed Industry
Inventec’s
Low Profitabilty

Industry-related Factors
Clients of Inventec are in extremely competitive industries
• Notebook computers, the single largest ODM product, had poor profit margins of 3-4%
in 2001, and below 1% for second tier ODMs
• Louis Woo, senior advisor for Inventec, “Our customers have been squeezed left and
right. The only way they can do business is to squeeze us.”

Difficulty in establishing product differentiation for notebook PCs

• Technology of PCs was in the processor and OS (Intel and Microsoft)
• ODM firms were unable to produce any meaningful differentiation, and forced to rely
on low costs to attract customers

Introduction Q2: Drivers of Q1: Factors accounting for Q3: Key factors to Q4: Indian Software Q5: Strategic advice
average profitability Inventec’s low profitability be managed Industry
Inventec’s
Low Profitabilty

Company-related Factors
Over-reliance on HPQ
• Until 2002, Compaq had been Inventec’s only notebook client
• In 2004, HP-Compaq still accounted for 75% of Inventec’s notebook production
• But, HPQ distributed its manufacture of notebooks amongst 4 ODMs (Arima, Asustek,
Compal, Inventec)
• HPQ relied on aggressive pricing strategies

Failure in building up meaningful relationships with its OEM clients

• In 2004, initial exclusive production of iPods spread out to 3 ODM firms
• Loss of Cisco’s phone business to a competing ODM
• Inventec did not fare well in establishing and maintaining meaningful relationships with
its OEM clients, thus resulting in low switching costs for them

Introduction Q2: Drivers of Q1: Factors accounting for Q3: Key factors to Q4: Indian Software Q5: Strategic advice
average profitability Inventec’s low profitability be managed Industry
Inventec’s
Low Profitabilty

Company-related Factors
Failure in capitalising on its strengths
• Inventec executive C.W. Lin, “Software is our strength. The core of our product is
the software that provides differentiation.”
• However, Inventec seems to have failed to fully capitalise on its software
expertise to differentiate itself

Failing to develop a low cost strategy that is sustainable

• With the 2001 easing of Taiwan govt restrictions, ODM firms moved into China
• All firms adopted the same cost structure

Introduction Q2: Drivers of Q1: Factors accounting for Q3: Key factors to Q4: Indian Software Q5: Strategic advice
average profitability Inventec’s low profitability be managed Industry
Key Factors

What are the key factors that a company like

Inventec needs to manage to earn above-average
profits in this industry?

Introduction Q2: Drivers of Q1: Factors accounting for Q3: Key factors to Q4: Indian Software Q5: Strategic advice
average profitability Inventec’s low profitability be managed Industry
Key Factors

Cost

Price elastic
Enjoy higher demand – increase
Might trigger
margins sales volume price war

Introduction Q2: Drivers of Q1: Factors accounting for Q3: Key factors to Q4: Indian Software Q5: Strategic advice
average profitability Inventec’s low profitability be managed Industry
India Software Industry

Why is the Indian software industry, on

average, so much more profitable than the
Chinese ODM industry?

Introduction Q2: Drivers of Q1: Factors accounting for Q3: Key factors to Q4: Indian Software Q5: Strategic advice
average profitability Inventec’s low profitability be managed Industry
India Software Industry
 Started Mid-20th Century
 World's top 5 Software Supplier, second only
to U.S.
 Fastest-growing software industry

According to rankings by the World Bank, Size of

India's software exports, Quality and Cost
composite index – Ranked First in the world

Introduction Q2: Drivers of Q1: Factors accounting for Q3: Key factors to Q4: Indian Software Q5: Strategic advice
average profitability Inventec’s low profitability be managed Industry
India Software Industry
Indian Software
Industry

Bargaining Power
of Suppliers

Threat of
Bargaining
Substitute
Power of Buyers
Products

Threat of Rivalry Among

New Entrants Existing Firms

Introduction Q2: Drivers of Q1: Factors accounting for Q3: Key factors to Q4: Indian Software Q5: Strategic advice
average profitability Inventec’s low profitability be managed Industry
India Software Industry

Rivalry Among Existing Firms : Medium

●
● Industry is concentrated, with a few publicly listed firms leading the industry
●
● Less head-on competition as services are customer-specific  Software is
designed to suit client requirements

Introduction Q2: Drivers of Q1: Factors accounting for Q3: Key factors to Q4: Indian Software Q5: Strategic advice
average profitability Inventec’s low profitability be managed Industry
India Software Industry

Threat of New Entrants : Medium

●
● High capital outlay  Lowers threat
●
● Government policies encourage growth of industry  Increases threat
●
● However, high abnormal earning profits together with government efforts to
develop the industry increases its attractiveness of the industry

Introduction Q2: Drivers of Q1: Factors accounting for Q3: Key factors to Q4: Indian Software Q5: Strategic advice
average profitability Inventec’s low profitability be managed Industry
India Software Industry

Threat of Substitute Products : N.A.

●
● Generally not applicable

Introduction Q2: Drivers of Q1: Factors accounting for Q3: Key factors to Q4: Indian Software Q5: Strategic advice
average profitability Inventec’s low profitability be managed Industry
India Software Industry

Bargaining Power of Buyers : Low

●
● Quality Assurance and ISO9000 authentication
●
● High switching cost for buyers as they require customised applications and
maintenance  Lowers buyer power
●
● Less price sensitive as product is unique to the requirements of the buyer

Introduction Q2: Drivers of Q1: Factors accounting for Q3: Key factors to Q4: Indian Software Q5: Strategic advice
average profitability Inventec’s low profitability be managed Industry
India Software Industry

Bargaining Power of Suppliers : Medium

●
● Labour forms the major cost for the Software Industry
●
● India Education system focuses on Communication & Math Skills – essential for software
industry
●
● Abundance of highly-skilled engineers  Lower supplier power
●
● But talented engineers are non-substitutable  Increase supplier power

Introduction Q2: Drivers of Q1: Factors accounting for Q3: Key factors to Q4: Indian Software Q5: Strategic advice
average profitability Inventec’s low profitability be managed Industry
India Software v.s. ODM Industry
Indian
Indian
Software
Software
Industry
Industry
Bargaining
Bargaining
Power
Power of
of
Suppliers
Suppliers
*MEDIUM*
*MEDIUM*

Threat of Bargaining
Bargaining ODM
ODM
Power
Power of
of Industry
Substitute Buyers
Industry
Profitability
Profitability
Buyers
Products *LOW*
*LOW*
Bargaining
Bargaining
Power
Power of
of
Suppliers
Suppliers
*HIGH*
*HIGH*
Threat
Threat of
of Rivalry
Rivalry
New
New Among
Among
Entrants
Entrants Existing
Existing Firms
Firms
*MEDIUM*
*MEDIUM* *MEDIUM*
*MEDIUM*

Threat of Bargaining
Bargaining
Power
Power of
of
Substitute Buyers
Buyers
Products *HIGH*
*HIGH*

Threat
Threat of
of Rivalry
Rivalry
New
New Among
Among
Entrants
Entrants Existing
Existing Firms
Firms
*MEDIUM*
*MEDIUM* *HIGH*
*HIGH*

Introduction Q2: Drivers of Q1: Factors accounting for Q3: Key factors to Q4: Indian Software Q5: Strategic advice
average profitability Inventec’s low profitability be managed Industry
 Strategic Advice

What strategic advice will you give Inventec to

improve its profitability?

Introduction Q2: Drivers of Q1: Factors accounting for Q3: Key factors to Q4: Indian Software Q5: Strategic advice
average profitability Inventec’s low profitability be managed Industry
 Strategic Advise
Enter new PC Market
• Target Rural China (80% of the population)
• Untapped Market
Cost Benefit
Additional R&D cost for Experience in developing
developing
Build or personalizing
Cost
up Brand for Non-PC/Laptop software solutions
Benefitfor over 2
products
new Software decades
• Inventec’s best seller in local market – Electronic dictionary
Sell at •Lower price Bigger market size
Inventec software focused on multimedia educational programs specializing in language
Faced
Lower stiff competition
training
Profit Margin from Able
Greater to go after a larger
quantity
Indian IT firms Software-centered market
Risk Brand dilution Increase brand awareness
Change of Focus – Majority of Software has Benefit
Cost
Provide Consulting services higher profit
• Help companies create
its Software is embedded in itsLessCustomised Software
margin Solutions
compared to Hardware
Marketing Cost risky compared to increasing
• Design Information System & Manage IT operations and resources
Hardware•
products proportion of branded sales which may
E.g. IBM
risk alienating its own clients

May incur additional R&Don

Focus cost
CostSoftware development Build on its strength in Multimedia
Benefit
educational
• Separate its proprietary software programs
from hardware products
Marketing cost
• Provide Alternative source of revenue
customised software that is designed to meet clients' needs
Less Demand for electronic dictionary Avoid competition with Lenovo, Toshiba or
Additional
compared to Demand forLabour
PC cost Has the Expertise
HP-Compaq and labour
in the saturated PC market
to provide such services
Introduction Q2: Drivers of Q1: Factors accounting for Q3: Key factors to Q4: Indian Software Q5: Strategic advice
average profitability Inventec’s low profitability be managed Industry
THANK YOU!
Q&A